Prospect of board games at Fairfax

Fairfax Media
chairman
Roger Corbett
will face a tough call in the next few days if iron ore billionaire
Gina Rinehart
succeeds in buying another 10 per cent of Fairfax and demands a board seat.

Rinehart owns more than 4 per cent of the company and last night she managed to get another 5 per cent.

Suggestions in some circles yesterday that a 15 per cent stake would give Rinehart effective control of the company are patently ridiculous.

The Fairfax family owned about 15 per cent after the merger with Rural Press in 2007. It was in a position to influence boardroom decisions on choice of management and strategy but was not in control of the company.

The family had a strong vested interest in the financial performance being improved but, above all, the family’s two director representatives,
John B. Fairfax
and his son
Nicholas
, were guardians of the Fairfax family tradition over more than 150 years of providing balanced, quality and independent journalism.

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However, Corbett would still face a tough call in relation to Rinehart, considering he sanctioned Nicholas Fairfax remaining on the board when his family’s shareholding fell to 9.7 per cent in 2009.

Nicholas left the board last year after the family sold its shares for about 85¢ each.

If Rinehart’s Fairfax play follows the pattern she followed at
Ten Network Holdings
in late 2010, she will expect a seat on the board. The chairman of Ten, Brian Long, had no qualms about offering her a seat, just as he had offered a seat to new shareholders Lachlan Murdoch and James Packer. Packer later resigned.

Corbett would have watched with interest as Ten, following Rinehart’s appointment, changed its programming to include a new program by her favourite News Ltd commentator, Andrew Bolt. This could have been viewed as Rinehart influencing edit­orial decisions, which would be ana­thema to Corbett.

However, this is not to say that a Fairfax board seat would be without power and influence. As the publisher of influential newspapers and the country’s most popular website, smh.com.au, the company’s directors do have political influence at both state and federal level.

One way of looking at Rinehart’s move on Fairfax is that she is seeking to establish herself as a corporate player by making a small investment relative to her total wealth. The Fairfax tender offer for 10 per cent is equivalent to less than 1 per cent of her estimated fortune of $20 billion.

Her ambition to be a corporate player appears to stem from her belief that she is not taken seriously. Ironically, a decision by Corbett and the Fairfax board to keep her out of the boardroom could be seen as confirmation she is a player to be feared.

However, Corbett would be unlikely to block Rinehart’s demands without considering the advantages of having her inside the tent.

If she is appointed a director, she would become an insider and limited in what she could say publicly about her ambitions and plans for the ­company. As an outsider, she would be free to criticise the company’s ­strategy publicly and become a disruptive force.

If she joins the board, she would be one of nine directors acting in the best interests of all shareholders and not just Hancock Prospecting, her preferred investment vehicle.

It is not clear from Rinehart’s track record at Ten Network, or from the limited comments she has made publicly, that she has come up with solutions to the problems besetting the ­global media industry.

Ten Network’s strategy has been to slash costs and change its programming to win back the younger viewers who were the keys to its success until about three years ago.

While cost cutting is a large component of the strategy being implemented by Fairfax chief executive
Greg Hywood
, the issues facing the company are far more urgent than those facing Ten.

Fairfax needs to monetise its huge digital audiences while making the transition from newsprint, which has higher ad rates, to the preferred new delivery systems of tablets, phones and other screens, which have lower ad rates.

Hywood has been running as fast as possible to make the transition, including launching what has been shown to be the most popular iPad news app in the market for smh.com.au. It has been downloaded by more than 300,000 readers, which is about 10 per cent of the 3 million online users.

Hywood’s response to the pressure on revenue caused by cyclical lows in ad markets and from the transition from print to digital has been a commitment to permanently cut the company’s costs by $85 million a year by June 2013.

That cost-cutting promise has not been a catalyst for upward movement in the share price. Pressure on the board to boost the cost-cutting commitment coincides with the completion of a company-wide review by consultants Bain. Rinehart’s stepped-up buying will increase the pressure on the board to deliver more.

She has moved at a time when Fairfax shares have traded at near their lowest level since the company came out of receivership in the 1990s.

He sums up his thinking behind buying a big position in Fairfax with the phrase: “Bad is good."

“When you buy a company and things are terrible and everyone is giving up on it, the chances of losing money are slim," he said.

He reckons that even if Fairfax does badly, its shares will still do well. Marais is known to have talked about Fairfax being worth $1.50 a share.

It is therefore not surprising that Orbis did not sell shares into Rinehart’s tender offer. However, Orbis has shown with some of its other large investments, including Hastings Diversified Utilities Fund and Spotless Holdings, that it is willing to back takeover offers or proposed bids that meet its valuation criteria.

Valuing Fairfax is tricky given the challenges it faces. Its net asset backing per share is about $1.93. The earnings yield, which is the relationship between profits and market value, says the stock is a screaming “buy".

With earnings last year of $274 million before extraordinary non-cash impairments, and a market capitalisation of $1.7 billion, the earnings yield is 16 per cent.

The inverse of the earnings yield is the price-earnings multiple, which is about six using the historical earnings of the past three years. This is cheap relative to other industrial companies.

However, the question is whether the business will be able to grow when faced with the transition process and the downturn in advertising. Bankers who specialise in media stocks say the jury is out as to whether Fairfax will succeed in making the transition to a digital future.

However, they say the company is better placed to succeed because of the quality of its assets, its knowledge of its audience and its premium brand.

But the large level of shorting of Fairfax shares and the gloomy forecasts of several high-profile analysts have led many to conclude that the company is fully priced around current levels, and that earnings will stay static for at least three years.

Rinehart is not necessarily getting a bargain.

Grant O’Brien’s strident criticism of the latest promotional offer from Coles is a pointer to what will happen this year as the super­market duopoly steps up their war.

The Woolworths chief executive claims that a basket of the same goods being promoted by Coles is 29 per cent cheaper at ­
Woolworths
.

He admits that Woolworths has dropped the ball on its marketing and its corporate communications. He is trying to rebuild and strengthen those skills as quickly as possible.

At the same time, he is trying to remove one of the drags on profit by selling the Dick Smith electronics chain.

The fact that it will cost $300 million to exit this business, including shutting 100 stores, says a lot about the scale of the strategic misstep. Big W stores will remain the largest Australian promoters of Apple products.

But Woolies is still beholden to the consumption habits of supermarket consumers for its growth.

Winston Smith from the George Orwell novel 1984 would appreciate the two performance charts published by
Hastings Diversified Utilities Fund
and
APA
Group, which is trying to take over the former.

As a member of the party that believed and knew black was white, Smith could see that Hastings and APA have presented black as white.